Family Friendly Equity Indexed Annuities?

Q. Hello Jeff,

I'm considering the purchase of a $175,000 Equity Indexed Annuity from a trusted independent insurance agent and a close family financial advisor. He is not an investment broker and the transaction will not be going through a licensed investment broker. Am I doing the right thing? Where am I vulnerable? What would you advise?

Thank you in advance.

A. Has your friend mentioned that he/she stands to make close to $17,000 off the deal?

There are several concerns here. First, I am not a big believer in Equity Indexed Annuities. Check out my website for several articles and details. The main reason is that they force you to lose control of that money for several years because of high surrender penalties. The only reason there are surrender penalties are because that's how the insurance company gets back the huge commission it paid the agent.

Secondly, the fact that your advisor is just an insurance agent means that he/she must solve all your needs through insurance products. Equity Indexed Annuities are the only product that an insurance agent can offer that is in any way tied to the market. He/she can't offer you real estate-based investments, stocks, bonds, CD's, mutual funds or anything else. It's like asking a podiatrist to operate on your heart! (not recommended...) There are many alternatives that can provide similar or higher returns with the same amount of risk that don't lock you into them for 10-15 years.

If you must have an EIA type product then look at Equity-Linked Certificates of Deposit. This is a FDIC insured CD where the return is tied to the market. They operate virtually identical to EIAs but since there aren't big commissions paid to an agent, they are much more liquid and don't tie your money up as long. You can find ELCDs for as short as 3 years or 7 years. The penalties to cash them in are trivial compared to those of Equity Indexed Annuities.

Thanks for your question. Be very skeptical...

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